In recent years, the field of synthetic biology has relied a little too heavily on hype, storytelling, and "changing the world" -- whatever that means. That all sounds great at conferences and makes for compelling investor presentations, but there's more low-hanging fruit in biology-based technologies than the giant egos of Silicon Valley and Boston realize. Codexis (CDXS 4.63%) might be the prime example among publicly traded companies.

The company has developed a technology platform that takes advantage of what makes biology unique and competitive in the first place: enzymes. Rather than fitting square pegs into round holes, as the rest of the field seems to, Codexis allowed the technology to dictate the business model. Throw in the ability to keep operating expenses low and execute strategic priorities, and Codexis is on pace to become the first synthetic biology-focused business to deliver consistent operating profits.

The recent third-quarter 2018 results show the business is on a promising trajectory, which hints that this small-cap biotech could be due for a big 2019.

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By the numbers

Codexis engineers enzymes, the molecules that power all living things, for specific applications in manufacturing and healthcare. In manufacturing, the company designs enzymes that can be added to production processes to produce drug products or food ingredients in fewer steps, at lower temperatures, and with less waste and energy consumption.  . In healthcare, the company engineers enzymes to create better diagnostics or medicines -- where the enzyme is the medicine, rather than something added to the manufacturing process used to produce a customer's drug product.

It's been a great niche. The sleepy business finally turned a corner in 2017 and started getting attention from Wall Street in 2018, and is heading into 2019 with positive momentum. Consider how operating results for the first nine months of the last two years compare:


First Nine Months, 2018


First Nine Months, 2017

Year-over-Year Change

Product revenue

$18.3 million


$19.1 million


R&D revenue

$26.2 million


$9.2 million


Total revenue

$44.5 million


$28.3 million


Product gross margin




About equal

Operating expenses

$55.2 million


$52.1 million


Operating loss

($10.4 million)


($23.8 million)


Source: SEC filing.

While product revenue declined in 2018 compared to the prior-year period, that was the expectation from the beginning due to shifts in product mix. However, management did recently drop the high end of full-year 2018 guidance for both total revenue and product revenue by $1 million each. It now expects total revenue for the year in the range of $60 million to $62 million (a year-over-year increase of up to 24%) and product revenue in the range of $25 million to $27 million. Product gross margin is expected to climb to between 47% and 51%, hinting at a huge surge in the final quarter of this year.

Meanwhile, an operating loss of $10.4 million for the first nine months of 2018 doesn't look promising, but it's a huge improvement from the year-ago period. It's also getting better each quarter. Codexis posted an operating loss of only $2.1 million in the third quarter of 2018, which represents $8.4 million on an annualized basis.

By this time next year the business could be profitable thanks to two specific catalysts. First, Tate & Lyle, a leading food ingredients and consumer brand company, just began to ramp-up production of a novel stevia sweetener ingredient for food and beverage applications. The manufacturing process relies on engineered enzymes from Codexis, and represents the company's largest-volume contract. Second, and what gets Wall Street analysts most excited, are the opportunities tucked away in the company's clinical drug pipeline.

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Codexis clinical update

The enzyme engineering leader's foray into clinical trials is off to a good start. The lead drug candidate, CDXS-6114, is being developed as a potential treatment for the rare metabolic disorder phenylketonuria (PKU). In a phase 1a study, the experimental treatment was well tolerated in healthy individuals, and a dose-dependent response was observed. Importantly, there were no reports of gastrointestinal side effects. That's a tiny but crucial detail for investors.

Why? Most biologic drugs must be administered via injections because they can't survive the trip through the acidic environment of the stomach. Needless to say, it's not the most patient-friendly delivery method -- and Codexis thinks its enzyme engineering prowess gives it a huge advantage. CDXS-6114 is still a biologic drug, but it's been designed to not degrade in the stomach, and therefore can be taken orally.

It's still too early to get overly excited about the drug candidate, but successful development and commercialization could net Codexis $89 million in development milestones, $250 million in sales milestones, and tiered royalties on sales from partner Nestle Health Science. Considering there aren't any great treatment options for PKU patients, and BioMarin Pharmaceutical still manages to generate over $400 million in combined annual sales from its Kuvan and Palynziq franchises, there's a significant opportunity for a safer, more effective, and more convenient medicine. Wall Street is cautiously hoping CDXS-6114 can seize that market. 

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Looking ahead

Codexis stock has cooled off a bit since being catapulted from a market cap of $300 million to $1 billion in the span of a year. That incredible rise appears to have been driven by Wall Street's expectations for the company's drug development efforts.

While the early stage drug pipeline could prove important in the long-run, the ability to generate profitable sales from enzymes used in manufacturing applications is more important for individual investors today. In addition to significantly de-risking future drug development, the industrial side of the business positions Codexis to become the first publicly traded synthetic biology company to achieve consistent operating profits. That hints that 2019 could be a pretty big year for the business -- and perhaps the share price.